Sacramento/Central Valley

Woodard, Jack | May 01, 1995

Sacramento has fared better than most of California during the lingering statewide recession, and this is reflected in the commercial real estate market in the capital region. Speculative building remains slow, but some other market segments have done better, as has the region's economic base.

The first seven months of 1994 showed a 40.5% jump in the overall value of building permits and construction contracts awarded in the four-county Sacramento area, according to McCarthy, Sacramento. Due to this, there was a 10% increase in construction contracts in 1994 as compared to the peak month of June 1994.

High technology finally appears to be living up to its promise to become a major engine driving the local economy. It accounts for some 10,000 jobs and the number promises to increase during 1995 and thereafter.

Packard Bell now is in operation in the former Sacramento Army Depot and should be a substantial employer as it gets up to speed. Apple Computer recently announced a 200,000 sq. ft., $80 million expansion of its plant in the Laguna area. Intel Corp. has completed a 320,000 sq. ft., $52 million addition to its Folsom campus. In Roseville, NEC Electronics recently purchased 50 acres for future growth, and Hewlett-Packard has leased 180,000 sq. ft. of new space.

The other bright spot in the industrial sector is that mainstay of the Sacramento economy: warehouse/distribution. Fleming Foods last year leased 175,000 sq. ft. in Sacramento, Walgreens is building 500,000 sq. ft. in Woodland, and Panattoni Development has begun a 600,000 sq. ft. Ball Glass facility in Fairfield.

Industrial lease rates in 1994 remained at about the 1993 levels, which were at an eight- to 10-year low. Most leases in buildings of over 25,000 sq. ft. have ranged from $0.19 to $0.23 a month per sq. ft. triple net, while spaces less than that have been mainly $0.20 to $0.35 per sq. ft. gross. Office industrial space rented from $0.55 to $0.65 per sq. ft.

Due to the continuing dearth of spec building, the vacancy rate last year was at a 15-year low of 8.6% and is expected to drop to 7% this year, according to CB Commercial.

One of the larger deals of 1994 was the acquisition by Genentech of 100-plus acres in Vacaville for a $150 million biotechnology plant. Mark D. Hefner of Brown, Stevens, Elmore Sparre represented Genentech in the transaction.

Hefner and two partners this year also negotiated the lease by the state Department of Corrections of Aerojet Corp.'s 100,000 sq. ft. headquarters campus in Rancho Cordova.

Since the beginning of 1994, six Japanese companies have visited Sacramento in an effort to find sites for new factories, McCarthy reports.

Office construction slow

In general, office construction continues to be slow. The state of California has put the brakes on its office consolidation program in downtown Sacramento. A 325,000 sq. ft. building at 13th and I streets, to be occupied mainly by the state Department of Justice, is one of the few survivors.

Among the few spec projects still under way is the Voit Cos.' Olympus Corporate Centre in Roseville. Its 44,000 sq. ft. second phase was completed in December and opened 85% leased, according to Voit senior vice president for leasing James B. Allen. Ground was broken for an identical third phase in March. The 122,000 sq. ft. first phase remains fully leased.

"The major challenge for the rest of the decade will be finding financing for niche market development," says Richard Weirich of BTV Crown Equities Inc., which has two spec office buildings under way in the region.

Net office absorption in 1994 was over 1.2 million sq. ft., up from 1993 but still anemic compared to the peak year of 1990, when nearly 3 million sq. ft. was absorbed. Rental rates were virtually flat, ranging from $1.35 to $2.50 per sq. ft. fully serviced in Class-A downtown buildings, and from $1 to $1.85 in the suburbs.

* North Natomas is an affordable suburban submarket with large blocks of contiguous space available. It will likely experience one of the highest absorption rates for the overall market.

* Folsom/El Dorado Hills is seeing increased interest, coming largely from the high-tech sector, which will reduce the vacancy rate and spur build-to-suits.

* Downtown, the majority of Class-A space, such as the Wells Fargo Tower, US Bank Plaza, 1201 K Street and One Capitol Mall, has found users. The submarket went from a 12.45% vacancy rate to 9.65% to end 1994.

* The Highway 50 Corridor, where lack of large contiguous space remains the biggest concern, saw vacancy drop from 8.08% at the be, ginning of 1994 to 6.8% to start 1995. The area may experience negative absorption in 1995 due to large tenants leaving for other submarkets in order to satisfy expansion plans.

In nearby Fresno, Class-B offices have not been doing as well as Class-A space, according to Hal Kissler, president of Manco Abbott Inc., which manages shopping centers, offices and apartment complexes from Stockton to Bakersfield. "Our Class-A will continue to do well," Kissler adds.

Rents in Class-A space are $1.30 and up per sq. ft. per month, he says, and they are $0.90 to $1 for Class-B space.

Big boxes dominate retail

Big box retailers continue to be the dominant growth element in the Sacramento retail market. Nineteen of them opened outlets or broke ground in 1994 for a total of 1.4 million sq. ft. Most handled the entire project on their own.

BTV has retail projects, which Weirich describes as "highway commercial" or "small big box," under way in Woodland and San Ramon for 20,000 to 30,000 sq. ft. tenants.

Rents in areas of residential growth like Laguna and Roseville now range from $1.40 to $1.65 monthly per sq. ft. and are rising. Rents in anchored centers in matured areas remain flat at $0.85 to $1.25 per sq. ft., while rents in strip centers have headed down to $0.75 to $1 per sq. ft.

Buying and selling of existing projects typifies the apartment market. Many projects changed hands, but new construction was nil. Larger, better-situated properties found ready buyers at prices ranging up to $38,000 per unit; properties of the same quality in less-desirable locations found no buyers at all.

Cap rates varied widely when comparing transactions by size and quality. Newer, better quality complexes of 100 units or more saw cap rates drop almost 50 basis points in 1994, while older properties of less than 100 units experienced a cap rate increase of 50 points.

In Fresno, apartment rents have not risen, but have remained flat the past few years, according to Kissler. "There has been minute new construction," he adds.

"The paradox is that rents have not gone up, the population is growing and there is no building to speak of," Kissler says. "Fresno is at the tail end of California's recession," he says, adding that he expects to see some building in the next 24 months.

Occupancy in Fresno's Class-A apartments runs between 92% and 94%, and for Class-B apartments 85% to 90%, Kissler notes.